Federal Court of Australia

YTL Power Investments Limited v Commissioner of Taxation [2023] FCA 258

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) and r 26.01 of the Federal Court Rules 2011 (Cth), the proceeding be dismissed with no order as to costs.

2.    The applicant pay the respondent’s costs of the interlocutory application from 2 November 2022, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

HESPE J:

INTRODUCTION

1    By its originating application dated 9 September 2022, the Applicant seeks declaratory relief in relation to capital gains tax issues relating to the year of income ended 30 June 2022.

2    On 2 November 2022, the Respondent (Commissioner) filed an interlocutory application seeking summary dismissal of the proceeding pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) and/or r 26.01(1)(a) of the Federal Court Rules 2011 (Cth) on the basis that the Applicant has no reasonable prospect of successfully obtaining the declaratory relief sought.

3    The parties agreed that the application be determined on the papers.

4    For the reasons that follow, I have concluded that the Commissioner’s interlocutory application should be allowed.

OVERVIEW OF THE PROCEEDING

5    By its originating application, the Applicant seeks declarations pursuant to s 39B of the Judiciary Act 1903 (Cth).

6    It is not disputed that the Applicant, at the relevant time, was a foreign resident as defined in s 995-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97). By an agreement executed on 8 February 2022, the Applicant agreed to sell its 33.50% shareholding in a company called ElectraNet Pty Limited, an Australian proprietary company.

7    At all material times, ElectraNet was the holder of an electricity transmission licence and an electricity system control licence issued pursuant to the Electricity Act 1996 (SA). By an agreement dated 20 September 2000, ElectraNet purchased the assets (other than excluded assets) of Transmission Lessor Corporation. The excluded assets were leased to ElectraNet.

8    The Applicant made a capital gain on its disposal of its shares in ElectraNet.

9    The declarations sought by the Applicant relate to the application of Div 855 of the ITAA 97. Section 855-10 relevantly provides for a capital gain from a CGT event to be disregarded if the taxpayer is a foreign resident just before the CGT event and the CGT event happens in relation to a CGT asset that is not “taxable Australian property”. The declarations sought by the Applicant are directed to the issue of whether its ElectraNet shares were taxable Australian property as defined in s 855-15 of the ITAA 97.

10    The Applicant seeks declarations to the following effect:

(1)    A declaration that the capital gain made by the Applicant in respect of the CGT event in respect of the Applicant’s disposal of its shares in ElectraNet pursuant to the Share Purchase Agreement dated 8 February 2022 should be disregarded under s 855-10(1) of the ITAA 97.

(2)    Further or alternatively, a declaration that the transmission network assets leased by ElectraNet were:

(a)    personal property of Transmission Lessor Corporation; and

(b)    not fixtures forming part of the land leased by Transmission Lessor Corporation to ElectraNet.

(3)    A declaration that the expression “real property”, where it is used in the definition of “taxable Australian real property” in s 855-20 of the ITAA 97, takes its legal meaning, which is to be determined by reference to the common law as varied or affected by any relevant statutory provisions of the State in which the property is situated.

(4)    A declaration that ElectraNet’s interest in the transmission network lease was not taxable Australian real property as defined in s 855-20 of the ITAA 97.

THE INTERLOCUTORY APPLICATION

11    Subsequent to the filing of the Applicant’s originating application, on 3 October 2022, the Commissioner issued a notice of assessment to the Applicant for the year ended 30 June 2022, including in the Applicant’s taxable income a capital gain in respect of the Applicant’s disposal of its ElectraNet shares. By attachment to a letter dated 5 October 2022, the Commissioner set out reasons for his decision to issue the notice of assessment.

12    By letter dated 7 October 2022, the Commissioner’s legal representative invited the Applicant to discontinue the proceeding.

13    By interlocutory application filed on 2 November 2022, the Commissioner seeks summary judgment dismissing the proceeding on the basis described at [2] above.

14    The Commissioner relies on written submissions dated 18 November 2022 and 9 December 2022.

15    The Applicant relies on written submissions dated 2 December 2022.

APPLICABLE PRINCIPLES

16    Section 31A of the Federal Court Act provides, in part:

(2)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is defending the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

(3)    For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

for it to have no reasonable prospect of success.

(4)    This section does not limit any powers that the Court has apart from this section.

17    Rule 26.01 of the Rules provides, in part:

(1)    A party may apply to the Court for an order that judgment be given against another party because:

(a)    the applicant has no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding; or

(b)    the proceeding is frivolous or vexatious; or

(c)    no reasonable cause of action is disclosed; or

(d)    the proceeding is an abuse of the process of the Court; or

…

(4)    If an order is made under subrule (1) dismissing part of the proceeding, the proceeding may be continued for that part of the proceeding not disposed of by the order.

18    In Spencer v Commonwealth [2010] HCA 28; (2010) 241 CLR 118, Hayne, Crennan, Kiefel and Bell JJ stated at 139 [53]:

[Section] 31A departs radically from the basis upon which earlier forms of provision permitting the entry of summary judgment have been understood and administered. Those earlier provisions were understood as requiring formation of a certain and concluded determination that a proceeding would necessarily fail. That this was the basis of earlier decisions may be illustrated by reference to two decisions of this Court often cited in connection with questions of summary judgment: Dey v Victorian Railways Commissioners and General Steel Industries Inc v Commissioner for Railways (NSW).

(Footnotes omitted.)

19    Their Honours continued at 140 [56] and 141 [58]–[60]:

56    Because s 31A(3) provides that certainty of failure (“hopeless” or “bound to fail”) need not be demonstrated in order to show that a plaintiff has no reasonable prospect of prosecuting an action, it is evident that s 31A is to be understood as requiring a different inquiry from that which had to be made under earlier procedural regimes. It follows, of course, that it is dangerous to seek to elucidate the meaning of the statutory expression “no reasonable prospect of successfully prosecuting the proceeding” by reference to what is said in those earlier cases.

…

58    How then should the expression “no reasonable prospect” be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is “no reasonable prospect”. The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like “no reasonable prospect” is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes, as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.

59    In many cases where a plaintiff has no reasonable prospect of prosecuting a proceeding, the proceeding could be described (with or without the addition of intensifying epithets like “clearly”, “manifestly” or “obviously”) as “frivolous”, “untenable”, “groundless” or “faulty”. But none of those expressions (alone or in combination) should be understood as providing a sufficient chart of the metes and bounds of the power given by s 31A. Nor can the content of the word “reasonable”, in the phrase “no reasonable prospect”, be sufficiently, let alone completely, illuminated by drawing some contrast with what would be a “frivolous”, “untenable”, “groundless” or “faulty” claim.

60    Rather, full weight must be given to the expression as a whole. The Federal Court may exercise power under s 31A if, and only if, satisfied that there is “no reasonable prospect” of success. Of course, it may readily be accepted that the power to dismiss an action summarily is not to be exercised lightly. But the elucidation of what amounts to “no reasonable prospect” can best proceed in the same way as content has been given, through a succession of decided cases, to other generally expressed statutory phrases, such as the phrase “just and equitable” when it is used to identify a ground for winding up a company. At this point in the development of the understanding of the expression and its application, it is sufficient, but important, to emphasise that the evident legislative purpose revealed by the text of the provision will be defeated if its application is read as confined to cases of a kind which fell within earlier, different, procedural regimes.

(Footnotes omitted.)

20    See also Spencer at 131–2 [24] (French CJ and Gummow J) and Trkulja v Google LLC [2018] HCA 25; (2018) 263 CLR 149 at 157–8 [22] (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ).

SUBMISSIONS OF THE PARTIES

21    The Commissioner submits that the Applicant has no reasonable prospect of successfully prosecuting the proceeding because there is no reasonable prospect of the Court granting the declarations sought.

22    The Commissioner relies upon s 175 of the Income Tax Assessment Act 1936 (Cth) (ITAA 36) and s 350‐10(1) item 2 of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA) (the current equivalent to the former s 177 of the ITAA 36). The practical effect of s 350‐10(1) is that if the Commissioner makes an assessment and issues a notice of assessment to the Applicant, the assessment can only be challenged in Pt IVC proceedings. Absent a challenge to the validity of the assessment on the basis that it is tentative or provisional or was made otherwise than in good faith, the tender of the notice of assessment in this proceeding is conclusive evidence of the particulars of the assessment, including the taxable income of the Applicant.

23    The Commissioner contends that the declarations sought by the Applicant are wholly concerned with its liability to income tax on the capital gain arising on the disposal of its ElectraNet shares and overlap entirely with the issues that would be raised for determination in proceedings under Pt IVC of the TAA. The declarations are in the nature of a collateral attack on an assessment the correctness of which is beyond challenge in these proceedings. The notice of assessment having been issued and tendered, these proceedings have been supplanted by the process provided for in Pt IVC of the TAA.

24    The Applicant submits that:

(1)    the issue of the assessment does not render the proceeding futile because the declarations will assist, if not determine, the outcome of the objection and (if made, as submitted for by the Applicant) avoid the need for a Part IVC appeal or review. The declarations, if made, would require the Commissioner to determine the objections in the Applicant’s favour;

(2)    the declarations seek answers to questions of law which are not particulars of the assessment protected by the conclusive evidence provision;

(3)    the controversy between the parties concerns whether the term “real property” as used in Div 855 of the ITAA 97 “has its technical legal meaning or, as the Commissioner contends, some broader (as yet unidentified) meaning”. This was said to be a “pure question of law” which, if answered in the Applicant’s favour, will determine the way in which the objections should be decided. The technical legal meaning is to be determined by reference to s 30 of the Electricity Corporations (Restructuring and Disposal) Act 1999 (SA) and s 36A of the Electricity Act 1996 (SA).

25    The Applicant further contends that the tendering of the assessment does not deny this Court jurisdiction to make the declarations although the grant of the relief is discretionary. The matters weighing in favour of the exercise of the discretion were identified by the Applicant as:

(a)    The Applicant has voluntarily entered into an escrow arrangement … to protect the Commissioner’s position, in the expectation that there would be a speedy resolution of the preliminary legal questions.

(b)    If the relevant plant and equipment is not real property, the Applicant, as a non-resident with no other taxable income, has no obligation to lodge an income tax return.

(c)    The legal issues raised by the declaratory proceedings must be determined in order to properly apply Div 855. It is the primary issue which must be addressed in the consideration of the objection. Moreover the Commissioner does not contend that he has no interest in having this “preliminary issue” determined according to law so that the Applicant’s objection can be decided on a correct legal basis[.] There is no doubt that this is a serious legal issue which will have a fundamental effect on how the Commissioner determines the objection.

(d)    There is currently no appeal or review under Part IVC. The proceeding is not futile, as it will determine a critical issue relevant to the objection or which would arise in any appeal.

(e)    The issue is a pure question of law which will turn on the legislation and the written agreements. As is apparent from the pleadings, there is no substantive factual dispute. The Court has the necessary evidence and the case is ready to be heard.

(f)    The Federal Court is the usual court for the resolution of Commonwealth tax controversies.

(g)    [T]he exercise of discretion would achieve the purpose of s 37M(1) of the [Federal Court Act] namely the speedy and efficient resolution of disputes.

(h)    It would appear that the assessment was issued in an attempt to frustrate this proceeding.

CONSIDERATION

26    The grant of declaratory relief pursuant to s 39B of the Judiciary Act is discretionary.

27    For the following reasons, the Applicant does not enjoy a reasonable prospect of obtaining the declaratory relief it seeks.

28    First, when the Applicant commenced these proceedings, no notice of assessment had been issued. That state of affairs was altered on 3 October 2022. Upon the issue of the notice of assessment, the Applicant had a right to object against the assessment in accordance with Pt IVC of the TAA: s 175A of the ITAA 1936.

29    The Applicant accepts that the assessment can only be amended or set aside through the objection process and, if that is not successful, through an appeal or review under Pt IVC of the TAA. As the High Court stated in Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; (2008) 237 CLR 146 at 153 [10] (Gummow, Hayne, Heydon and Crennan JJ), “as a matter of discretion, relief under s 75(v) of the Constitution and s 39B of the Judiciary Act may be (and often will be) withheld where there is another remedy provided by Pt IVC”.

30    The legislative scheme for review of income tax assessments under Pt IVC of the TAA provides for a process of internal review in the form of the objection process and then review by the Administrative Appeals Tribunal or appeal to the Federal Court. Having accepted that the assessment is valid, the Court does not consider that there is a reasonable basis for the Applicant to circumvent the statutory process for review.

31    Second, while the Court has jurisdiction to hear and determine these proceedings, the manner in which that jurisdiction may be exercised is impacted by s 350‐10(1) of Sch 1 to the TAA. That section relevantly provides:

(1)    The following table has effect:

32    The section reinforces the legislative intent that the process for challenging an assessment is that provided for in Pt IVC of the TAA. Generally speaking, once a document of the kind mentioned in s 350‐10(1) of Sch 1 to the TAA (formerly s 177(1) of the ITAA 36) is produced, an assessment is not open to challenge in a proceeding under s 39B of the Judiciary Act: Australia and New Zealand Banking Group Ltd v Commissioner of Taxation [2004] FCA 1410; (2003) 137 FCR 1 at 14 [33] (Kenny J).

33    The taxpayer’s contention that the declarations seek answers to questions of law which are not particulars of the assessment protected by the conclusive evidence provision is not accepted. The first, second and fourth declarations sought relate directly to the application of s 855‐10 of the ITAA 97 and to the substantive liability of the Applicant. The declarations, on their face, raise matters of fact and law. The terms of the third declaration do not clearly articulate a response to a question of law that is tied to the matters the subject of the proceedings. It fails to identify with any precision the legal issue which the Applicant contends would be determinative of the proceedings. The third declaration is not directed to a question directly posed by the terms of the legislation and is not purely a question of statutory construction that can be decided divorced from the facts.

34    Third, the Court is not satisfied that the matters identified by the Applicant would either weigh in favour of, or have relevance to, the exercise of the Court’s discretion to grant declaratory relief:

(1)    The fact that the Applicant may have held a subjective expectation that there would be a speedy resolution of a preliminary legal question when entering into an escrow arrangement cannot bind the Court and is not relevant to the exercise of the Court’s discretion.

(2)    The relevance to the exercise of the Court’s discretion to grant declaratory relief of the possibility that the Applicant may not have had any obligation to lodge an income tax return is not apparent.

(3)    That the legal issues sought to be raised by the declaratory proceedings are necessary in order to properly apply Div 855 reinforces the conclusion that the views formed by the Commissioner about the matters in respect of which declaratory relief is sought are matters that form part of the process undertaken by the Commissioner in determining the taxpayer’s substantive liability and are matters forming part of the process of assessment. They are matters properly for determination within the Pt IVC process.

(4)    Based on the submissions of the Applicant, the Court infers that an objection against that assessment has been lodged and the Pt IVC process has been initiated. There is no basis for interfering with that process.

(5)    As explained above at [33], the declarations sought raise matters of fact and law.

(6)    Part IVC of the TAA provides two avenues for review: merits review in the Tribunal and appeals to the Federal Court. The jurisdiction of the Court can be invoked under Pt IVC without the need for recourse to s 39B of the Judiciary Act.

(7)    The declaratory proceedings raise the prospect of a multiplicity of proceedings. By its submissions, the Applicant appears to seek to reserve a right to invoke Pt IVC proceedings if the declarations sought are not made in the form for which it contends. The issues raised by the declarations sought would require the determination of what, on their face, appear to be disputed issues in the absence of agreed facts, including potential issues of valuation. Furthermore, by its terms, it is difficult to see how the third declaration resolves any issue in dispute. The third declaration fails in its terms to identify the “relevant State provisions” or identify with any precision the question of statutory construction to which it is purportedly addressed. To the extent that the declaration seeks to invoke, in some way, s 30 of the Electricity Corporations (Restructuring and Disposal) Act 1999 (SA) and s 36A of the Electricity Act 1996 (SA), it does not do so with any precision.

(8)    Given the statutory framework of Pt IVC of the TAA, absent an allegation of invalidity of the assessment, the fact that the assessment may have been issued in response to the commencement of this proceeding is not a matter that weighs in favour of the exercise of the discretion.

35    The circumstances of this case are distinguishable from those considered by Moshinksy J in ASZ21 v Commissioner of Taxation [2021] FCA 1304. In that case, no assessment had been issued. That is not the present case. As the High Court observed in Futuris at 162 [48] (Gummow, Hayne, Heydon and Crennan JJ) and as Gaudron J explained in Enfield City Corporation v Development Assessment Commission [2000] HCA 5; (2000) 199 CLR 135 at 157–8 [58], the usual discretionary considerations attending the grant of equitable remedies apply to injunctions and declarations in public law cases. Once assessments are issued, issues relating to the substantive liability of the taxpayer are properly matters for determination within Pt IVC of the TAA.

36    However, that is not to say that once the Court is seized of a matter under Pt IVC, the efficient disposition of those proceedings may not be furthered by the determination of a preliminary question of law. This may particularly be the case if the Court is provided with an agreed statement of facts and an agreed question of law directly posed by the terms of the relevant legislation (cf Chevron Australia Holdings Pty Ltd (No 2) v Commissioner of Taxation [2014] FCA 707 at [13] per Robertson J).

CONCLUSION

37    For the above reasons, the Commissioner’s interlocutory application is to be allowed.

38    The assessment enlivening the Applicant’s rights under Pt IVC was issued on 3 October 2022, after the Applicant’s proceedings were commenced. The Commissioner’s application for summary judgment was dated 28 October 2022 and accepted for filing on 2 November 2022. By that time, the Applicant had had 30 days to consider its position. In these circumstances, the Court considers it appropriate that the Applicant bear the costs of this interlocutory application on and from 2 November 2022.

Associate:    

Dated:        24 March 2023